A fine levied on Bank of Beirut UK in March came as a
reminder of the difficulties Lebanese banks and their foreign
units are facing, in a global environment of increased
regulatory scrutiny. London’s Financial Conduct
Authority (FCA) said that between 2011 and 2013 the bank had
"repeatedly provided the regulator with misleading
information", after being told to do more to ensure it was not
being used for financial crimes.

We are a dollarized economy; we need access to the US
financial system

Nassib Ghobril,
Byblos Bank

At just £2.1 million, the fine is minuscule compared
to the billion dollar-plus fines the US has handed European
banks for poor money laundering controls or sanctions breaking.
However, in addition to the fine, the FCA also banned the unit
of Bank of Beirut – Lebanon’s sixth
biggest bank, and regarded in Beirut’s banking
community as particularly strong in trade finance –
from booking new clients in "high-risk jurisdictions" for just
over four months.

The FCA defined "high-risk" as any country scoring 60 or
less in the Corruption Perceptions Index published by Berlin
nonprofit group Transparency International. That includes
countries where Bank of Beirut has offices, including Ghana,
Iraq, Libya and Nigeria – as well as the
group’s home country,
Lebanon itself.

Bank of Beirut’s UK subsidiary said it had not
deliberately broken any FCA principles, and it did not profit
or cause loss to its customers or counterparties in doing so.
It noted the FCA had not found an actual breach of its control
and risk management systems. Even so, it said since 2013 it has
"significantly enhanced the resources in its compliance and
risk teams" – and that it had hired a new head of risk
and compliance, and replaced the chief executive.

"Compliance with its regulatory obligations is a key area of
focus for the bank going forward," the bank stated.

The news follows a 2011 debacle in which the US treasury
said Beirut-based Lebanese Canadian Bank (LCB) had helped
launder hundreds of millions of dollars for a drug trafficking
network between South America and
the Middle East and Europe, via West Africa – a
network which also helped finance the Lebanese Shia
organization Hizbollah, a terrorist group, according to the
US.

Slapped

That episode led to LCB’s closure and the sale
of most its assets to Société
Générale’s Lebanese unit. Although
LCB settled in the US, the head of the Lebanese central
bank’s anti-money laundering unit, Abdul Hafiz
Mansour, says there were no convictions in Lebanon, due to a
lack of evidence.

Nevertheless, since then, Mansour says the Lebanese central
bank has slapped new compliance requirements on banks, such as
making them observe not just local requirements but also
requirements their correspondent must observe, including
sanctions lists. Lebanese banks’ compliance
burdens have since rocketed, meaning "an important additional
cost", says Freddie Baz, chief financial officer at
Audi.

"We can’t afford to be left like Russia,
Argentina or Iran. We rely on our diaspora," says Marwan
Mikhael, Blominvest’s head of research.

"Our intention is to respect international norms," says
Riad Salamé, Lebanon’s central bank
governor. "We’re serious about it.
We’re implementing laws and regulations for that.
The banks will have to abide by these new international
criteria for their operations, and the market will decide which
bank can do it, and which bank cannot do it."

Audi, the biggest Lebanese bank, now has 46 compliance
officers in Lebanon and an additional 62 outside Lebanon.
Chahdan Jebeyli, Audi’s head of compliance, says
that number will now increase by 80 people due to a central
bank circular last year requiring a compliance officer in every
bank branch in Lebanon. A Blominvest research note in December
says such costs may make it harder for smaller banks to survive
on their own, making mergers more attractive.

In a speech in Beirut in 2013, Daniel Glaser, assistant
secretary for terrorist financing at the US treasury,
recognized that "the Lebanese financial system is a critical
asset to the people of Lebanon". But an expansion strategy in
countries perceived as equally risky or even riskier than
Lebanon, such as west African nations with big Lebanese
business communities, Iraq, and eventually Syria, are crucial
elements of the sector’s growth potential.

Chris Finney, a former insider at the UK’s
Financial Services Authority, and now a partner at US law firm
Cooley, says expansion in countries Western states deem high
risk will mean
Lebanese banks will inevitably face bigger regulatory
burdens. "The UK and European perspective is that if you have
branches or a head office outside Europe or the US and Canada,
the risk from money laundering and terrorist financing can be
assumed to be higher," he says.

For Finney, one danger is that even Lebanese banks deem it
no longer worthwhile doing business in places like Iraq and
Africa – countries in urgent need of banking services.
"It’s making it harder for the ordinary guy to go
about his business," he says. "That could mean regulators could
be pushing people back into poverty, and into precisely the
kinds of activity they are trying to guard against."

Local firms are using the experience of doing
business in acute political volatility for the next
stage of their international expansion. Braving
coups, corruption and violence, banks are expanding
into some hair-raising countries.

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